Title: EUR/USD Weekly Outlook: Bulls Hope for a Dovish Fed Stance
Original article by Pablo Piovano, FXStreet
The EUR/USD currency pair concluded the first week of December under pressure, primarily influenced by the resurgent strength of the US Dollar and shifting expectations around central bank policy tightening. The pair, which had previously gained traction on the back of dovish commentary from Federal Reserve officials and expectations of earlier-than-expected rate cuts, faced renewed downward pressure as US labor market data defied expectations and cast doubt on an imminent dovish pivot.
This article provides a detailed outlook for EUR/USD in the coming week, analyzing the impact of macroeconomic indicators, central bank rhetoric, and technical chart patterns.
Overview of the Past Week: USD Rebounds as NFP Surprises to the Upside
The EUR/USD finished the week near the 1.0750 level, after previously testing highs near 1.1017 at the start of the month. The week was marked by pivotal US economic releases, mostly centered on labor market data. The key development driving the USD’s rebound was the stronger-than-expected nonfarm payrolls (NFP) report for November.
Key highlights:
– The US economy added 199,000 jobs in November, surpassing projections of about 180,000.
– The unemployment rate declined to 3.7%, down from 3.9% in the prior month.
– Wages rose 0.4% month-over-month, also trending above expectations.
– Labor market participation increased moderately to 62.8%.
This relatively resilient payroll data contradicted recent market sentiment that had been leaning heavily toward the Fed pausing or even pivoting toward policy easing as early as March 2024. The shift in labor market perceptions led to a resurgence of demand for the US Dollar, reversing the EUR/USD’s recent bullish momentum.
Meanwhile, the Euro failed to gather significant support from regional data or European Central Bank (ECB) commentary.
Fed Watch: All Eyes on the December FOMC Meeting
The Federal Open Market Committee (FOMC) meeting scheduled for December 12 to 13 will be the focal point for currency markets in the week ahead. The central bank is widely expected to keep interest rates unchanged within a range of 5.25 to 5.50%. However, the Fed’s updated economic projections and the tone of Chair Jerome Powell’s press conference will be pivotal in shaping near-term Dollar dynamics.
Key considerations for the Fed meeting:
– The “dot plot” of rate projections will illustrate officials’ forecasts for the federal funds rate over coming years.
– Markets will scrutinize any downgrade in inflation or GDP projections that may influence future rate path guidance.
– Chair Powell’s stance on inflation persistence and any signals regarding rate cuts in 2024 will be closely monitored.
Investors have priced in nearly 100 basis points of policy easing by the end of 2024, but recent strong NFP data may cause a repricing of those expectations. Any indication that the Fed is not prepared to cut until the second half of 2024 could boost the Dollar further and weigh on EUR/USD.
ECB Preview: Governing Council Faces a Tough Balancing Act
The European Central Bank (ECB) will also hold its final meeting for the year on December 14. The ECB is also seen holding rates steady, but the emphasis will lie on forward guidance and updated macroeconomic projections.
Core topics to watch during the ECB meeting:
– Inflation expectations: October’s eurozone inflation dropped more than expected, with the headline rate falling to 2.4% year-over-year. The ECB may revise inflation expectations downward.
– Growth outlook: European economies, especially Germany, remain under pressure. Data points to subdued industrial performance and weak household consumption.
– Potential discussion on when to begin reducing the balance sheet via quantitative tightening.
ECB President Christine Lagarde will need to navigate a cautious path between maintaining inflation credibility and acknowledging the growing
Read more on EUR/USD trading.